A key question in Frankfort is whether state leaders will enact tax reform between now and the end of the 2014 legislative session.
But a challenge is the question posed by Senate budget chair Bob Leeper in a recent Louisville Courier-Journal article: “What do you mean by tax reform?”
Indeed. Tax reform is not an absolute good. Whether it helps or harms Kentucky depends on the purpose of the reform and the specifics of the proposal.
The recommendations of the governor’s tax reform commission, on which I served, were the result of 10 months of work including public hearings across the state and substantial commission debate. Our recommendations followed a set of principles and were intended as a package to be considered as a whole, not a menu to choose from.
However, recent comments suggest that political leaders may treat the remaining recommendations (a handful passed this session in the pension funding bill) only as a starting point for the conversation.
If that ends up happening, it begs the question of what assumptions, criteria and goals they will use to design a tax reform plan. Here are three principles that are critical:
Tax reform should not shift responsibility away from those most able to pay.
A plan that moves the system away from the individual income tax is nothing more than a shift in tax responsibility from the wealthy over to middle- and low-income Kentuckians. Such a shift would further widen income inequality and increase long-term budget problems by cutting our most productive revenue source, the income tax. Kentucky’s tax system already asks less of those most able to pay. We should be improving tax fairness, not making it worse.
Tax reform should raise revenue to help address our budget needs.
We’ve been through revenue-neutral tax reform—meaning no net new money—in Kentucky before, and it’s one of the reasons we’re still talking about the issue. Only tax reform that raises revenue can begin to address the $1.6 billion that has been cut from the budget and make progress on Kentucky’s many deficits in education, health and other areas. No credence should be given to the fantasy that cutting taxes would increase revenues by attracting massive migration of businesses and individuals to Kentucky.
Tax reform should recognize that economic strength depends first on a strong foundation.
Economic competitiveness often comes up in tax debates, but too often the focus is narrowly on the level of business taxes. In fact, cutting corporate taxes is a weak tool for promoting economic development, and can harm a state’s economy because it means fewer dollars to invest in worker skills and quality of life improvements. What’s more, Kentucky’s business taxes are already low compared to other states. Kentucky’s weaknesses in education and other areas that require public investments are the key barrier to our prosperity.
The purpose of negotiations between the governor and legislative leaders shouldn’t be to pass tax reform for tax reform’s sake. It should be to enact reform that moves Kentucky forward by making the system fairer and helping Kentucky afford crucial public investments. Without clarity about what is guiding reform, it’s possible to do more harm than good.